RE:RE:RE:RE:I was astounded In order to illustrate the effect of dilution, I have created the following scenario.
Company ABC and company DEF each purchase a competitor for $10,000,000. That competitor has annual revenues of $5,000,000 and generates $500,000 in operating cash flows.
Company ABC has $10,000,000 in the bank and company DEF has no money in the bank and will issue 20,000,000 shares at a price of $0.50.
| Company ABC |
| Shares outstanding | 200,000,000 |
| New shares acquisition | 0 |
| Shares total | 200,000,000 |
| Share price | $0.50 |
| Market cap | $ 100,000,000 |
| Debt | $ - |
| Cash | $ - |
| Enterprise value (EV) | $ 100,000,000 |
| Annual revenues | $ 40,000,000 |
| Annual revenu acquisition | $ 5,000,000 |
| Total revenues | $ 45,000,000 |
| TTM OCF | $ 4,000,000 |
| TTM OCF acquisition | $ 500,000 |
| Total TTM | $ 4,500,000 |
| Cash flow yield | 4.5% |
| EV / OCF | 22 |
| Company DEF |
| Shares outstanding | 200,000,000 |
| New shares acquisition | 20,000,000 |
| Shares total | 220,000,000 |
| Share price | $ 0.50 |
| Market cap | $ 110,000,000 |
| Debt | $ - |
| Cash | $ - |
| Enterprise value (EV) | $ 110,000,000 |
| Annual revenues | $ 40,000,000 |
| Annual revenu acquisition | $ 5,000,000 |
| Total revenues | $ 45,000,000 |
| TTM OCF | $ 4,000,000 |
| TTM OCF acquisition | $ 500,000 |
| Total TTM | $ 4,500,000 |
| Cash flow yield | 4.1% |
| EV / OCF | 24 |
In a perfect world, in order for the enterprise value of company ABC to be equal to company DEF, the share price of company DEF would fall to $0.45. The effect of dilution is that shareholders have lost ±10%.
| Company DEF |
| Shares outstanding | 200,000,000 |
| New shares acquisition | 20,000,000 |
| Shares total | 220,000,000 |
| Share price | $ 0.45 |
| Market cap | $ 99,000,000 |
| Debt | $ - |
| Cash | $ - |
| Enterprise value (EV) | $ 99,000,000 |
| Annual revenues | $ 40,000,000 |
| Annual revenu acquisition | $ 5,000,000 |
| Total revenues | $ 45,000,000 |
| TTM OCF | $ 4,000,000 |
| TTM OCF acquisition | $ 500,000 |
| Total TTM | $ 4,500,000 |
| Cash flow yield | 4.5% |
| EV / OCF | 22 |